Series 3 Episode 1: Embracing diversity and inclusion – strategy, data and watermelons

Andrew Strange:

Hi everyone, and welcome back to the Risk & Regulation Rundown podcast after our short summer break. I’m Andrew Strange, your regular host, and as usual, we're recording remotely, so please note this might impact on our sound quality. In today's episode, we're discussing inclusion and diversity, following some significant regulatory papers on this topic published in July. I am delighted to be joined by Brenda Trenowden, a PwC Partner, who leads our inclusion and diversity client business, and is also a former global chair of the 30% Club, which campaigns to increase gender diversity at board and senior management levels. I’m also joined by Jasmine Campbell, a Senior Manager in our internal audit team, who works with a range of clients on diversity and inclusion.

Brenda, before we get to the specific detail of the regulators’ recent proposals in this space, can you just start by setting the scene for us in terms of the journey that both financial services regulators and firms have been on over the past few years? What angle are regulators approaching this from, and what stage are most firms at in their inclusion and diversity journey?

Brenda Trenowden:

Well thanks Andrew, you’ve asked lot of questions there, let me try and tackle them. First of all, it's important to understand that, over the past many years, I've been looking at this really wearing two hats. Firstly, before I joined PwC, I was in banking, and I was a senior manager myself under the Senior Managers and Certification Regime, with all of the responsibility that comes with that regulated role. Secondly, as you mentioned, I spent many years working with chairs, CEOs and investors to improve gender diversity in my voluntary roles, particularly as global chair of the 30% Club. As a result, I took part in many discussions with FS firms and regulators, really with a view to widening the talent pool, improving culture, and ultimately diversity of thought, and encouraging appropriate challenge and that ‘speak up’ culture to mitigate risk. It's about changing the behaviour of firms, for the better, and it's also about financial inclusion - we call it inclusion by design. You can't design financial products and services for a broad range of customers, unless you truly understand their needs. Without having that direct experience or insight into those needs, meaning that you need that diverse workforce, you can't do it.

We've heard lots of speeches from people like Mark Carney and Andrew Bailey, and more recently from Nikhil Rathi, talking about the importance of this. I would say that, whilst over the years it's not been as high a priority as I would like to see, it's definitely been steadily moving up the agenda. We've had great campaigns that have helped to drive this like the 30% Club campaign, Government-sponsored initiatives like Davies and the Hampton-Alexander reviews. The Women in Finance Charter really importantly, Alison Rose’s review and then the Investing in Women Code, and of course, gender pay gap reporting. On top of that, investors have been really pushing for more disclosure and progress, and I've had direct experience of that through the 30% Club investor group; particularly the big pension funds have really been pushing this agenda. Now, we've got the ‘S’ in ESG really gaining traction and leading to even more calls for action. Those are the angles and that's the progress that I've been seeing, hopefully that answers your questions.

Andrew:

Yes, thanks Brenda. You're right, it has been moving up the agenda and there have been lots of speeches over the last few years. Now, we finally have some concrete proposals. The FCA, PRA and the Bank of England jointly published a discussion paper on diversity and inclusion in July, and a few weeks after that we had the FCA also consulting on a requirement for all listed companies to be more transparent about the diversity of their boards and their executive teams. Brenda, what's your overall take on those proposals and their likely impact?

Brenda:

First of all, it's fantastic that these proposals have come out, and there's quite a lot in in those papers, especially in the discussion paper. I think it's going to lead to, hopefully, much more focus on the data, what kind of data needs to be gathered and the impetus for gathering data, also better definitions, and understanding of what we're looking for. Diversity of thought is quite a wide and ambiguous thing, I think it’s better to be really clear on diversity demographics, diversity strengths, increased disclosure and reporting on progress. Really making companies understand that, that we can't just skate over this, this is something that everybody is expecting to see and why it's really important. Ultimately, all of this really should force companies to realise that they need to devote time and resource, because their stakeholders increasingly care about it. And of course, it will help to achieve better business outcomes. Maybe I am being overly optimistic in having too much expectation around these papers, but those are certainly my hopes.

Andrew:

Optimism is allowed, I am quite comfortable with that. Jasmine, optimistically if I can bring you in here, what are your thoughts on the proposals, particularly from an internal audit perspective?

Jasmine:

Thanks Andrew. In terms of the proposals, this is necessary and extremely important. The introduction of this paper is no accident. We've heard that over the last year there's been a number of speeches that have come from the regulator with regards to the importance of inclusion and diversity (I&D). With that, and thinking about internal audit’s role around that, our FS code absolutely states that internal audit’s purpose is to protect the firm's assets, reputation and sustainability - for the fear of being too professional here - but really key to that is the culture, and the embedding of I&D as it is critical to enable this. Internal audit has a key role to play in helping to measure the change. For example, in measuring the effectiveness of embedding their strategy, training, and I&D measures. But I think it's also important to highlight here that internal audit can really leverage the engagement, the partnership, the role they have across the organisation to role model what we would expect to see around here. So within the internal audit function, how are we ensuring we've got the right workforce strategy, one that is diverse and inclusive, how individuals are trained in terms of the industry insights that are needed to help the organisation address some of these key challenges? So I think the paper’s timely, maybe overdue some may think, but it's really critical that we do have some guidelines around this to really help move the dial, because there's some great benefits that are going to come out of thinking differently in terms of how we run our businesses.

Andrew:

Thanks Jasmine, and the cynic in me says, so what progress are firms actually making?

Jasmine:

Since the spring of 2020, there has been a realisation from firms that there is more that can be done, and as a result they’re wanting support understand whether the efforts that they are making are really hitting the mark. There are some real good examples, and firms are thinking about, how are the board engaging, is leadership really working to promote as well as drive that inclusive culture that we're seeking, is there a clear strategy and action plan? We've seen some really good examples where organisations have started to think about the action plan around inclusion and diversity, and how that aligns to their overarching strategy. A really big area is how this has been embedded in the people strategy and the talent pipeline, and the succession planning of the organisation. We've seen some really good examples, where organisations are really thinking about how they're weaving this into their operating model. Some challenges we're seeing are around GDPR and other regulated rules. For example, in Germany, there are very strict rules on a lot of useful I&D information, which can't be used. So it's very easy for some global firms to say, given the restrictions, given our locations, we can't do certain things. However, there is always that conversation around, ‘well, okay, what else can you do to see what's going on and where you might need to put your efforts’.

Lack of internal communications is a real common thing we see and I am going to quote Brenda here. Brenda often talks about action over articulation. Actually, it's really refreshing that the organisations we speak to acknowledge that there is a lot of external communications around the I&D commitment, and how that aligns to the culture that the organisation is trying to drive, the pledges that have been signed up for, but actually when you look and speak to people within the organisation, that is not obvious. So thinking about, or having a lack of internal communications, a lack of engagement and role modelling from senior leadership, and no clear plan of direction in terms of where the organisation is trying to get to, are some of the key themes that we often come across when we're doing work in this space.

Andrew:

Thanks Jasmine. It feels like data is a huge part of meeting many regulatory requirements nowadays. I’m guessing it has to be a key element of making a success out of these proposals too. Jasmine, you referenced GDPR there, which I totally get. Brenda, you made some reference to date through one of your earlier questions - what sort of things should firms be thinking about and what are some of the other data challenges, Brenda?

Brenda:

That's a really good question, Andrew. Jasmine mentioned a number of these things. We speak to clients about this every day and every client is struggling around the data piece. Number one, because most clients stretch across more than one legal jurisdiction. The regulations are different in every legal jurisdiction around what you can and can't ask, as per Jasmine’s example about Germany. Also, you've got to factor in GDPR, which is different, data privacy laws are different in every country, and of course cultural nuances are different, and even the relevance of what data you gather. The jurisdiction piece is really important, but even backing up before that, companies need to start with what data are you going to collect, because different firms have different priorities, you shouldn't start with all diversity dimensions from the beginning. Really, it depends on what your priorities are and perhaps, setting a plan of, we're going to start with these three strands or two strands, and trying to get really good data there, and we're going to add to that over time. That's certainly what we've done at PwC.

The next important question is, are you going to gather that data as anonymised data, or attributed data. If it's anonymised, it'll give you a picture of the breakdown of your workforce, but you won't have the data to allow you to really start doing pay gap analysis, for example, or to set targets by certain business areas or types of business, and importantly, to be able to hold managers accountable for leading the change. So understanding which way you're going to gather it - attributed is clearly more difficult. How you're going to gather it is the next question; are you going to go out and email people specifically about this, are you going to gather it at certain points in the year when you're going out to all the staff anyway. Most companies will look at gathering it when they employ people, but for their existing employees, they're going to have to go out and get it another way. Where will you store it, who's going to see it, and how is that going to impact what you're going to gather?

As Jas mentioned, communication is incredibly important, because none of this is going to work if you don't build trust and tell people why you're asking for it, what you're going to do with it, and report back afterwards with what you've found. Being really honest about this is the picture and this is what we're going to do about it, and it takes time. When we started gathering data, our disclosure rates were not particularly high. Now we've got 100% disclosure rate on gender and 97% on ethnicity, but it took time and lots and lots of communication and action plans to build that trust. Then I mentioned the cultural nuances, how do you ask and what sort of categories do you use? If you don't spend time thinking about that, that can really backfire as well.

Then finally, the inclusion data, not just the diversity data; this is something Jasmine mentioned as well. Inclusion data is harder to gather, but that can be done through asking very specific questions in regular pulses or an engagement survey, or many of our clients are working with us to do inclusion insight assessments. So specific surveys, asking about sentiment on fairness, belonging, trust, psychological safety, and then breaking that data down by diversity demographics, because if you just look at the overall data, you don't get a sense of whether particular groups are feeling unhappy or marginalised, and whether you need to take specific action. Unless you have that, it's very hard to develop a specific plan to address your issues. To another point that Jasmine made, I heard a really funny expression yesterday about companies that were classified as ‘watermelon companies’: companies that are green on the outside in terms of all the virtue signalling and things that they're saying, but red on the inside in terms of real action. It's really important when you gather all this data to start showing that progress and holding people to account.

Andrew:

It's interesting in this conversation, we started talking about regulatory initiatives, but it clearly broadens out into something far more important and much greater. I think firms recognise that it's the right thing to do, and that having a diverse workforce and an inclusive culture is an important part for delivering for your customers and your staff, and it does bring business benefits. But Brenda, what are the broader benefits we're seeing, and to some extent some of the challenges associated with that?

Brenda:

I am really glad Andrew that you started with the benefits. Framing it in that way is important. We like to say that inclusion and diversity isn't a problem to solve, but it's a huge and untapped opportunity to seize. To that end, a couple of years ago, PwC together with the 30% Club, and a small group of progressive companies got together and gathered some case studies and launched an initiative called ‘are you missing millions?’, which was really looking at companies that have taken an outside in approach to diversity. We started with a gender lens, but we're really broadening it out now to look at much wider diversity dimensions, but thinking about the diverse makeup of your customer base, and taking an enterprise-wide approach to think about, how should we be looking at this from product and service design, marketing, communications, supply chains, risk management, and what opportunities are we missing by not looking at it this way.

We had retail companies, we had financial services firms, and many of them gave examples about when they’d broken down and looked at their customers this way, and really tried to get under the skin of what their customer needs were based on diversity dimensions, they did find they were missing opportunities, and when they addressed it, it did open up millions of pounds or dollars. The forward way of looking at this is really about that opportunity, and that commercial benefit. It's not just about widening the talent pool, and internal representation, there is money to be made by really putting this lens across an entire business, so I really hope companies are going to start to see this.

Andrew:

Well Brenda, one of the privileges of hosting this podcast is I get to hold some senior PwC staff to account here. I am assuming we're not a watermelon company, so what has PwC done, and what advantages have we actually seen from our actions on this?

Brenda:

Well, we're definitely not a watermelon company, but we're definitely not the finished article, either. It's really important to say that, like everyone else we're on the journey, but I am really proud that we have been doing quite a lot for a long time. First of all, in terms of data and disclosure, as I mentioned earlier, we have been gathering data and we've really been improving our disclosure rates. We started reporting gender pay gap in 2014. In 2017, we started reporting ethnicity pay gap. We're not compelled to do that, we did that voluntarily. We then broadened on to break down that ethnicity pay gap to get much more granular information. This year, in our 2021 annual report, we reported our socioeconomic pay gap as well. We're really trying to be very transparent, and to put all this information out there, so that our external stakeholders can hold us to account. The other thing is, we do a lot of robust analysis and predictive analytics, and we set targets. So we started with gender, we've added ethnicity, we're looking at disability, and moving through diversity dimensions, and we're holding our own partners and our managers to account for really driving progress. We've got a five-point action plan and we report on that as well very publicly, and once again, we're trying to show progress there. We do spend time thinking about this, we do the inclusion insight piece. We are progressing, but once again, we've got work to do. Like everyone, this is a continuous journey, but it's about having the information, being transparent about it, and holding people to account.

Andrew:

Absolutely, thank you. Jasmine, a lot of our listeners will be familiar with a range of topics that they have either been through and embedded into their businesses or they're acting on now, but it's always interesting to think about how these things interact with new issues such as this diversity and inclusion agenda. Thinking about things like ESG and governance, or as Brenda referenced earlier on, the Senior Managers Regime (SMR), how do these link in to the D&I agenda?

Jasmine:

They're absolutely (and it’s really good question Andrew), really key to embedding inclusion and diversity and creating that inclusive culture for organisations. With recent global events, investors, shareholders, employees, future talent and customers are really holding organisations to account, they're really doing their research in terms of ensuring that what organisations stand for are aligned to what they stand for as individuals, and key decisions before people even walk through the doors of some of these organisations are being made by what and how they're demonstrating on the societal aspects of ESG. And inclusion and diversity, and some of the good things that we’ve already spoken about, really sit within that societal piece. When you think about the workforce, yes there's diversity and inclusion, there's thinking about the wellbeing of individuals, so there's a lot around engaging, caring, and supporting everyone who works for the organisation, and also about developing how you are attracting, training, and retaining talent. All of this absolutely sits within the ‘S’ of the ESG. The tone from the top, and leadership sits within our governance, our conduct, and our SMR regime, and they are really critical to embedding the framework within the organisation. And it shouldn't be a framework, it should be the culture and how we do things, so they absolutely align to it.

We've seen really good examples as I touched on earlier where we're thinking about succession planning, and talent pipeline, but also when you're thinking about the Senior Managers Regime, and those certified roles, it's also about the functions, and those that are coming up through those functions, and what role modelling of the right inclusive behaviours are we demonstrating. And how does that then play through, in terms of their performance management, and the progression of individuals through an organisation. Whilst they are regulatory requirements, there is also an element of, it's the right thing to do. You can quickly see how, through embedding this through the way you do things as an organisation, you can start to get a competitive advantage with your talent wanting to stay with you, wanting to be innovative, wanting to work with you to move your organisation to where you want to get to. Strengthening your governance and leadership, helping to build that trust by engaging with your workforce, so that they understand all that you're trying to do is to get the organisation and the support that they provide the talent that they've got to the right place, and with that will come benefits as well.

A key thing that Brenda also touched on was making sure that the risk management framework absolutely has a lens on inclusion and diversity. One of the key risks here, and I'm going to refer back to Brenda's point around the watermelon companies, is reputational risk. The new generation coming up, the way people are thinking societally, social media and things like that, if we're not really taking action or moving the dial in this space, there is a big reputational risk that organisations face. And again, with embedding this into the management information, that is going to that leadership, and that we're using that to really act is also important around identifying where the areas of improvement need to be made and taking action to address that. Those key regulatory areas and initiatives, and I am sure many others, really do have a key role, and are already playing a role in this, and we just need to take a step back and think about how do we ensure that the I&D agenda, and inclusive culture, is incorporated within that.

Andrew:

Excellent. So I guess a lot of our listeners are thinking about this and thinking about next steps. Our current understanding is that the PRA and FCA plan to consult on more detailed proposals in the first quarter of 2022, and we're expecting a policy statement, maybe around the third quarter of next year. Depending on how you define things, we're probably a year or so away from having final rules on this. Given that, what's the one area that you would encourage firms to focus on over the next year, so that they're in the best possible position to comply with these rules and benefit from the opportunities going forward? Brenda, let me start with you.

Brenda:

Sure, thanks Andrew. Well, there's an awful lot to do and it's very complex, but I would say, and I am going to take senior leadership commitment as read, that’s the eternal optimist in me, but I would say the data and the diagnostic piece is the area that companies have to start with. Every company is different, they have different cultures, they're in a different situation, so look and see what data you have, and where are the gaps, what data do you need, and how are you going to gather that. Understand from whatever diagnostic you can do, what your own opportunities and challenges are, and set the priorities, and really get working on establishing that baseline and filling in the gaps, because without understanding where you are and having the data to start with, there's no way that you can start to address it. So the data and the diagnostic – and ultimately, self-awareness.

Andrew:

Thank you. Jasmine?

Jasmine:

For me, to add on to that, I would start with thinking about the strategy and the alignment of this within your overarching organisational strategy. Once you have that in alignment, it's a lot easier to address some of the underlying challenges that we often see. If it's aligned to your strategy and goals, and vision of the organisation, it’s easier to get that senior leadership buy in and commitment. It's easier when it comes to communicating internally as well as externally on why we are doing the things we're doing, and what the benefits we expect to achieve coming out of that is. Then it's easier for individuals along with that data, that Brenda has talked about, to understand why we as an organisation are putting efforts in certain areas as opposed to others, and the prioritisation of this. For me, it really is about being very clear on your I&D strategy and vision, and the action plan that you're going to put in place to embed that across your organisation.

Andrew:

Jas and Brenda, we could probably talk about this all day, but thank you so much for joining us. It's really interesting when you've got regulatory imperatives coming together with big business benefits and opportunities for firms. I hope our listeners have found some of these really fascinating insights and discussions today helpful. If you have enjoyed the conversation, please do subscribe to future episodes and don't forget to rate and review this series as it does help other people find us. And look out for our next episode next month. Thank you.